By Pankaj Pathak
September was an eventful month for the bond marketplace. The expectation of a reduction in government borrowing and chatter on worldwide bond index inclusion fueled a rally in the bond marketplace in the initially half of the month. It got additional accentuated by the under expectation inflation print of 5.3% in August 2021. The10-year government bond yield came down from 6.22% on August 31, 2021to 6.14% by September 20, 2021. On a month-to-month closing basis, the 10-year Gsec yield ended flat at 6.22%.
Yield curve
The yield curve (yields on various time to maturities) flattened throughout the month as the brief finish (up to 3-year maturities) bond yields moved up by 15-25 basis points on a month-on-month basis though the longer maturity (15 years and above) bond yields came down by 10-15 basis points.
The central government has pegged the second half government borrowing at Rs 5.03 trillion. This will take the complete year of government borrowing to the budgeted level of Rs 12.05 trillion in FY22. However, there will be no further borrowing on account of the GST compensation cess loan. The government had earlier estimated an more borrowing requirement of Rs 1.59 trillion to meet the GST shortfall in FY22. The unchanged complete-year borrowing implies that G-sec issuance to fund the fiscal deficit is really decrease.
RBI monetary policy
In its bi-month-to-month critique, the monetary policy committee (MPC) of RBI left the policy repo price unchanged at 4% and the reverse repo price at 3.35%. It also kept its forward guidance “to continue with the ‘accommodative’ stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.”
This was broadly in line with the marketplace expectation. The greatest surprise was the comprehensive removal of G-SAP (RBI’s bond-obtaining programme). In the backdrop of higher oil costs and increasing US treasury yields, the removal of G-SAP ought to lead to a rise in extended-term bond yields. The 10-year bond sold off by about 5 basis points soon after the announcement. Currently, the 10-year G-sec is trading about 6.31%, a level last seen in April 2020.
Liquidity and way ahead
On the liquidity front, the RBI did respond to the market’s contact and announced to enhance the quantity below 14 days Variable Rate Reverse Repo (VRRR) auctions in a staggered manner from present Rs 4 trillion to Rs 6 trillion by December 3, 2021. It also outlined an selection of conducting 28 days VRRR, if necessary.
We specifically like the 3-5 year segment of the government bond marketplace which in our opinion is currently pricing for some liquidity normalisation and a get started of price hiking cycle by finish of this year. Given the steep bond yield curve, 3-5 year bonds present the most effective roll down possible as nicely. In absence of assured RBI purchases, longer-term bonds may well face enhanced volatility and potentially decrease returns going ahead.
In the present juncture, a mixture of liquid to income marketplace funds to advantage from the enhance in interest prices in the coming months along with an allocation to brief term debt funds and/or dynamic bond funds with low credit dangers ought to stay as the core fixed revenue allocation.
The writer is fund manager, Fixed Income, Quantum Mutual Fund